Recent Posts

“The jury is still out.” That legal term has been a
headline for two centuries. In the 1940s, its usage morphed
to a broader reference factual findings of all types. We
will apply it to the stock market today.

The jury is still out but the evidence keeps coming
in.

For the last several months, we posited that the August 8
bottom of the S&P 500 Index at the 1100 level was a robust
selling climax. Whether it was an interim selling climax or
a final selling climax is unresolved. That jury is still
out.

The selling commenced at the beginning of May. It
accelerated sharply to the down side at the end of July and into
early August. The reasons that caused the sell-off are
history now, and discussion of them is redundant.

We have written on several occasions that the 1100 level
was established with intraday trading on August 8, tested twice
in the futures market and held. In the subsequent rally and
sell-off, the 1100 level was pierced on only one day. The
1100 S&P level has continued to hold and reflect a tentative
bear market bottom. The most recent test that successfully
reaffirmed this bottoming level of the S&P 500 Index occurred
on October 3. Markets have rallied strongly since.
The S&P 500 index is about1228 in Asian futures market pricing this
morning.

Many of our internal studies indicate that the potential
for an upward move in stock prices is huge. We are
positioning accordingly and have been since the sell off
intensifiedin
July. We have established this
position s risk takers, not as history book
writers.

On the other hand, there are conflicting and negative
forecasts that argue the opposite of Cumberland Advisors’
position. The negative forecasts are usually coupled with
recession forecasts. Readers see them every day on TV, hear
them on radio and read them in the financial press. Harsh
and negative forecasts dominate the media.

Meanwhile, the economic evidence is mixed. It does
not support the recession scenario. The US economy is not shrinking.The economy continues
to muddle along at a slow growth rate. There is
nostronglyrobust,apparentlyupward,trend. There
probably will not be one forseveral more years. Slow growth centered on 2% is more
likely to be the norm.

Fears of a financial market meltdown or a repeat of Lehman
Brothers/ AIG failures
of 2008 continue. Very negative pictures can be painted on
the outcomes of the European sovereign debt crisis. Other
negatives can point to more deteriorating factors in the United
States, such as the weak housing market and the high unemployment
rate.

In our view, all of these factors are known. They
have been established for some time. They have been mixed
into the pricing expectations in markets. In essence, they
are “old news”.

As investment risk takers,
we believe the August 8 climaxat 1100 levelwas a final
climax. That determination is the basis for our investment
posture. The climax is/was enough for us to take a
position on markets. It is not enough for us to write a
history book chapter. For historians,a candid assessment
of the outcomes would suggest that there is no sure way anyone
can know now. At the very least it was a robust interim
climax and set the stage for the strengthening stock market that
has occurred since.

For historians, it
remains to be seen ifthe 1100 levelwas the final selling
climaxlowin a market that
peaked on April 29, sold down in August, retested the low in
October, and is firmly in an uptrend. Historianswill not know that until the
market is much higher and more time has passed. Note that here is an
important difference between investment risk takers and history
book writers.

Historical studies suggest that there are two possible
scenarios at work. At this point in time they would look
alike so either one is possible.

Scenario 1.

History says that if
there is a serious, prolonged recession in the next year or so,
then it is likely that we witnessed only an interim selling
climax on August 8. That means there is another leg down in
stock prices ahead of us. That is the bear case promoted by
numerous money managers and advisory firms who forecast an
S&P 500 Index level of somewhere between 800 and 900 as a
bottom.

That is not the perspective at Cumberland. We support
a second scenario.

Scenario
2.

That history says there may not
bea
second leg down recession. Instead it calls for a slow but
steady rate of growth centered on 2% in real terms. It will
be accompanied by low rates of inflation and very low interest
rates. This is likely to be in place for the next couple of
years. This means the profit share to business will remain
very high, and it means there will be a slow but steady growth
rate of nominal GDP. From this rising nominal GDP, theearnings for American
business are likely to stay high and continue to rise.

Furthermore, there is some evidence that the housing market
is bottoming in some regions. This data is also
mixed. However, there are gradual signs that a base is
being formed in some housing sectors. The result of that is
to ease the pressures on the banking system, and indicate that
the credit problems attached to the housing debacle may begin to
subside.

If this is so, and we believe it is, then the
financialstocks,which have been
devastated for four years, are currently positioned for a buying
opportunity. In Cumberland’s case, we have
scaledinto financialsseveral times and
taken up the weights in the regional banks. So far,
thatisprovingthe correct course of
action. We have taken the overall financialsexposureabove market
weight. We continue to be a scaled buyer in
financials.

For an excellent discussion of the banking sector, see
Andrew Bary’s column in Barron’s this weekend. For
superb detailed discussionaboutbanks see Dick Bove’s
research at Rochdale
Securities. Additional excellent discussion is found in
Jason Benderly’s proprietary work on the financialsand
markets.

Ten days ago, the entire banking system of the United
States was for sale below itsstatedbook value. One
could argue it was for sale below its tangible book value, which
means you could buy all the banks in the United States
atstock exchangeprices trading for
less than their liquidation value. Clearly, that is an
absurd pricing level.

Are banks now sound? Answer: some are, some are
not. Are there still problems ahead in the
financialsandin the banking
sector? Obviously, yes. Is regulatory change an
issue? Again, yes. Are earnings derived from net
interest margin an issue? Once again, yes. Does that
mean that banks are dead forever? Our answer is a
resounding no.

The time to enter a sector and start to take up the weights
is when it has been devastated in a bear market for several years
and priced to an extreme. When you price the entire banking
sector below its liquidation value, below its tangible book
value, you are seeing a pricing level in a climate where all the
bad news is known or identified. Only then are you are
defining an entry point. Further, the financial sector
haslostten percentage points of the
valueshareof
the stock marketsince itspeak. Think
about this sector where it once was 24% of the marketweightand derived 40% of
the market’s earnings.
Now it is14% of the
marketweight. Its
earningsare substantially down from
the peak earnings that were extantfive years agowhen everyone wanted
to own financials.

In summary, we do not know for sure if the 1100levelon the S&P 500
Indexwasa
final selling climax established level orisan
interimselling climax
level. It will take more time to write that history
book chapter.We are basing
ourinvestment risk takingaction on the
likelihood it was a final climax. It will take months
before that finding is firmly established.

We do know that, at
least,we
did have arobust interimselling climax.
The1100level was tested
several times and has demonstrated support. We do know that
buyers are tepidly coming into stocks. There is a large
amount – trillions of un-invested funds – that face decisions
about whether to nibble at the stock market or stay in the bond
market or cash equivalents at very, very low interest
rates. In our view, the US stock market iscurrentlya place of
opportunity. We are in
it.

Cumberland’s US exchange-traded fund accounts continue to
be fully invested in diversified ETF portfolios. We
areincreasinglyemphasizing growth-oriented
ETFs at this time, and mixing the weights and sectors
accordingly. We are gradually taking up exposure to the
financial sector. We are targeting an S&P 500 Index
level of 1350-1400 based on a high profit share derived from a
GDP above $15 trillion. We expect that nominal GDP to rise
at about a 4% annual rate or higher for the rest of this
decade. We project that the GDP will reach $20 trillion by
this decade’s end. Our longer-term target for the US stock
market is the 2000 level or higher. If the GDP profit share
rises to the level we saw in the 1950s, that stock market outcome
could be much higher.